Assets bounce back, up 19%

The 500 largest money managers were able to catch their breath in 2009, as their worldwide institutional assets experienced a 19% increase — to $25.5 trillion, Pensions & Investments' annual money manager survey shows.

It was a year of partial recovery from the financial despair of 2008, when assets fell 21%. But assets at year-end 2009 still were well below the $27.5 trillion in worldwide institutional assets managed by the top 500 two years earlier.

Internally managed U.S. institutional tax-exempt assets among the top 500, meanwhile, grew at a more modest 10%, to $9.5 billion.

(The assets of Capital Research & Management Co., which did not provide figures for the year-earlier survey, were deducted from the 2009 data for the comparisons. Also affecting the total was that for 2009, AXA Investment Managers reported assets reflecting its broad asset management units, while in previous years it reported only for its U.S. division.)

Equity markets provided a strong boost to money manager assets, with the Russell 3000 gaining 28.3% and the Morgan Stanley Capital International Europe Australasia Far East index rising 31.8% in 2009.

That was a sharp reversal from 2008, when domestic and international equity indexes plunged between 37% and 43%. (Click here to view all the stories, tables and charts in this year's Largest Money Managers special report.)

But lingering concerns about poor equity performance and volatility in the markets were still haunting institutional investors, who continued their move last year to fixed-income strategies.

In 2009, internally managed active domestic equities for U.S. institutional tax-exempt clients reported by the managers in P&I's survey grew a healthy 24% to $1.6 trillion, but the growth in active domestic fixed income dwarfed that, rising 34.9% to $2.3 trillion. When adjusted for the 28.3% increase in the Russell 3000 stock index and the 5.93% hike in the Barclays Capital Aggregate bond index, the difference is even greater: Active equities dropped 3% while active bonds grew 28%.

Among passive strategies, domestic bonds grew 5.5% to $328.3 billion while domestic equities rose 27% to $1 trillion. International equities had the biggest jump, 36.2%, bringing assets reported at year-end 2009 to $287 billion. (On a market-adjusted basis, the domestic strategies both were relatively flat, while international equity shows a 3% gain.)

“The gains (in indexing) suggest some degree of institutional investor dissatisfaction with active management through the market downturn,” said Inga B. Sweet, a senior vice president and manager of the global manager research group at Callan Associates.

Callan's own data show net outflows in 2009 of nearly $161 billion from active institutional strategies, while index funds added approximately $75 billion.

While most of the biggest money managers in P&I's survey reported gains in 2009, several large firms continued to see diminished total worldwide assets. For example, Legg Mason Inc., reported $580.4 billion at year-end 2009, a drop of 4% from a year earlier. (Executives at Legg Mason did not return requests for comment.)

Money manager consultants warn the business has changed. The days when massive profits were practically guaranteed for money managers are gone.

“For the past 25 years, every firm that rolled out of bed had a very reasonable chance of obtaining 25% profit,” said Ben Phillips, a partner at Casey Quirk and Associates, Darien, Conn.

That is no longer the case, he said. Going forward, there will be clear winners and losers.

“Some money managers — particularly those that pay attention to running themselves as efficient businesses — will remain highly profitable. Some money managers will lose their shirts,” Mr. Phillips said.

Mr. Phillips said the P&I data reflect understandable reaction to the recent financial crisis.

“I expect we'll have a number of similar ups and downs in asset levels for the next decade, and shifts back and forth between active and passive, stocks and bonds,'' he said.

Mr. Phillips said a key point is that assets might not grow every year.

BlackRock Inc., New York, took the No. 1 spot on P&I's three key rankings of managers — worldwide institutional assets, U.S. institutional tax-exempt assets and U.S. institutional tax-exempt assets managed internally. Its dominance is due in large part to the merger last year with rival asset manager Barclays Global Investors NA. In the year-earlier survey, BlackRock had ranked third on the basis of worldwide institutional assets and BGI, second.

Robert Fairbairn, vice chairman, and head of BlackRock's global client group, said the firm clearly benefited from the merger with BGI.

He said, however, that BlackRock also reported strong net inflows in 2009, adding more than $150 billion in new long-dated net inflows.

Mr. Fairbairn said inflows were particularly strong in the fourth quarter of 2009, although he declined to provide specifics.

He said institutional clients were using indexation at the center of their portfolios, but also maintaining active portfolios in equities and fixed-income portfolios.

“People are increasingly being attracted to index strategies. The blending of passive and active is here to stay,” he said.

In another trend, he said more global institutional clients were hiring BlackRock and giving the money manager discretion on their own or in conjunction with a consultant to make tactical decision as to the best investments among multiple asset classes.

Boston-based State Street Global Advisors, the former top-ranked manager, dropped to second because of the BlackRock-BGI merger. Its worldwide institutional assets grew 36% to $1.681 trillion.

Scott Powers, president and CEO of SSgA, said the money manager had $248 billion in net inflows in 2009, 75% which came from existing clients.

He noted that in times of turmoil, institutional investors revert to index strategies. And he expects that trend to continue.

“Active managers of all styles have had trouble outperforming the benchmark; in that situation, passive managers become more attractive,” Mr. Powers said.

Bank of New York Mellon Asset Management moved up to third place, with a 20% jump to $979.9 billion in worldwide institutional assets.

Mitchell Harris, interim co-head of BNY Mellon's asset management division, said the New York-based firm saw strong inflows into passive equity strategies in 2009, and both passive and active strategies in fixed income.

“Because of the dislocation in fixed-income markets, investors were willing to pay a little more to achieve additional alpha,” he said.

Fidelity Investments ranks fourth in the current survey, up from fifth place at the end of 2008, with a 28% increase in assets under management.

Jack Haley, executive vice president of investment services for Fidelity Personal & Workplace Investing in Boston, said the company had extremely strong domestic equity performance.

“In 2009, our average equity fund beat its benchmark by over 560 basis points,” he said. “So if you just take the S&P at 26.5% and add 560 basis points, you can see this real strong performance that was driven by our equity and high-yield managers. I would say also, this was across the board — very strong performance.”

Mr. Haley said another factor that benefits Fidelity is that lifecycle funds are a qualified default investment alternative.

“That has been a strong driver of flows,” he said.

Mr. Haley said more than 49%of participants in Fidelity client plans held all or part of their assets in a lifecycle fund by the first quarter of this year, up from just 23%in 2005.

Vanguard Group saw a 43% increase in AUM in 2009 to $830 billion, moving into fifth place from ninth.

Gerard Mullane, a principal and director of institutional sales for Vanguard, Malvern, Pa., said 2009 was a record year for the company, with $101 billion in total net cash flow.

He said more than two-thirds of that was institutional money, driven primarily by flows into defined contribution plans.

About 75% went into indexed products, including traditional index funds, target-date funds and exchange-traded funds, he said.

“In terms of trends in the marketplace, we're seeing a lot more scrutiny from plan sponsors on provider fees, cost of investment options and the benefits of index funds,” he said.

Mr. Mullane said that scrutiny was benefiting index funds, as the market turmoil has convinced many investors to seek lower fee index funds.

Fixed-income giant Pacific Investment Management Co., Newport Beach, Calif., moved up one notch in P&I's ratings to sixth place, with a 31% jump in worldwide institutional AUM, to $810.4 billion.

Jon Short, the head of PIMCO's U.S. institutional business development group, said the company was able to grow in 2009 because its investment results remained strong, even during the financial crisis.

“We did a better job managing risk than our competitors,“ he said. “This put us in a good position with clients who were looking at a stable asset class like fixed income.”

Tom Otterbein, PIMCO's director of client facing, Americas, said the money manager stressed to investors last year that the marketplace has changed, which called for new thinking about where to invest. “Our view is that we are on a bumpy journey with a slower rate of global growth,” he said.

The company is broadly recommending a more global fixed-income approach and potential investments in the distressed credit and mortgage marketplaces, Mr. Otterbein said.

PIMCO statistics show that of the assets gained in 2009, about 53% is new business and existing client flows and 47% is market appreciation.

J.P. Morgan Asset Management slipped one rank to seventh place in the current survey with a 5% gain, to $753.7 billion.

John Hunt, New York-based CEO of J.P. Morgan Asset Management's institutional business in the Americas, said the money manager had positive inflows across asset classes.

But he added it was not surprising that managers who specialized in fixed income were the biggest winners in 2009.

“I think fixed-income inflows were strong across the board; if you were purely fixed income, you had a very good year,” he said.

Going forward, Mr. Hunt expects outflows in one category in 2010: the asset manager's global cash asset program, but says it appears to be a positive that investors are willing to increase their risk levels and use the cash they had parked.

“It is a good sign that institutional investors are regaining confidence and moving back into risk assets,” he said.

Among other findings in the year-end 2009 survey:

• The increase in equity markets during 2009 had its impact on the aggregate asset mix of the largest 500 firms with internally managed U.S. institutional tax-exempt assets. Equities rose five percentage points to 45.5%. Bonds dropped 1.6 points to 33.6%; cash was down 2.9 points, to 10.5%; and real estate equity dropped 1.3 points to 3.6%. Private equity and hedge funds, broken out in the asset mix for the first time this year, made up 1.1% and 0.7% of assets, respectively.

• Among the largest 100 managers of internally managed U.S. institutional tax-exempt assets, the changes were even more marked. Equities rose 4.9 points to 44.4%; bonds dropped 1.5 points, to 34.8%: cash was 11.7%, down from 15%; and real estate was 2.5%, down from 3.3%. Private equity accounted for 0.8% and hedge funds, 0.6%, of the assets.

• Defined contribution plan assets under management by the firms in the current survey increased 27.5%, to $3.3 trillion. Internally managed defined contribution plans saw a 28% gain in assets in 2009 to $2.9 trillion.

• Defined benefit plan assets managed internally increased to $3.26 trillion last year, up 2.4% from 2008, while endowment and foundation assets managed internally increased 16% to $498 billion.